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James Regan

Fed Cut will it help the Shale Patch?

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I saw that article in Barron's and it made me scratch my head. I've been watching oil prices a long time. The general perception I grew up with was that oil and inflation walked hand in hand. And that if anything, higher oil prices led to inflation because the input of higher priced oil caused higher prices of plastics, drugs and tires. For example, in 1972 the price of oil was $3/bll. Due to the oil embargo and the resulting fuel crisis, the price of a barrel of oil had risen to $40 by 1979. During that same period, the CPI, the consumer price index, doubled. Then, for some reason that I have never understood, this relationship started to break down during the eighties. When the Gulf War I began, oil was $20/bll. It rose to $40, but the CPI remained flat. Again, during the period from about '98 to about '05, the price of oil went from $18 to $50 but the CPI didn't rise much. They tell us that core inflation is currently tame. On these pages I have been unable to stop myself from yammering on about how global oil prices have been kept artificially low by an unusual collision of forces: a) the Saudis deciding to swamp shale oil in 2014, flooding the market, b) the subsequent improvement of technology, allowing lower break-even prices in the sweet spots of shale, c) the president tweeting down the price of oil by holding Kasshogi's death over MbS's head. If my early perception of oil prices and inflation co-trafficking still hold up, then I believe it is totally feasible that low inflation during the greatest economic expansion of my lifetime is partially the result of . . . low oil prices. I have used this analogy so many times that it is threadbare, but if you consider coffee beans a commodity, as they are, then look at what has happened to the price of a cup of coffee. Fill an oil barrel (56 gallons) with Starbucks latte and it'll cost you almost $5,000. Yet beans are cheap and oil is a nonrenewable commodity that required a million years at the same ideal temperature and pressure to mature it. Additionally, oil is hard to harvest, transport and turn into the ultimate end product. Yet we're running roughshod over our sweet spots and selling our finest light, sweet shale oil like it's bathtub gin. What we're doing makes no sense! Soon, most of our drillers--other than Chevron, Shell, Occidental, Exxon--are going to be languishing in the bankruptcy courts, we're going to be down to Tier 2 and 3 properties, and the Saudis will once again gain the upper hand. At that point, I believe we can expect $100 oil. And with that, despite a long separation of the relationship between inflation and the price of oil, I believe we'll finally, once again, see inflation--and I don't think there's much anyone can do about it. I doubt very much that this convoluted passage helps your understanding. I'm no expert in this. It's just that you bring up a great point, one that I've been struggling with since I read the Barron's piece yesterday, and all I can do is apply my life's lessons to the conundrum. My early lesson that the price of oil heavily influences inflation cannot be scrubbed from my memory bank, even though my higher cortical reasoning tells me that such has not always been the case. 

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